Wednesday, March 14, 2007

Securitisation to help banks to free funds

Securitising existing loans can render funds to banks for further lending and help them deal with shortage of capital, a Crisil study said.

Funds raised, therefore, will not require equity dilution and will be free from constraints of additional deposits, the rating agency said in a release.

“Contrary to popular perception, the process of securitisation need not be data-intensive and complex. Banks could make a beginning by securitising highly-rated single loans, which could release capital to the extent of 9 per cent or more of the loan, and also remove the provisioning requirements, which could be as high as 2 per cent,” said Ramraj Pai, director handling structured finance ratings, in the release.

“Funds raised would not be subject to cash reserve ratio and statutory liquidity ratio, resulting in a more efficient use of funds. Over time, the bank could evolve to more complex transactions and use securitisation more centrally from a funding perspective,” he said.

The CRISIL study attempts to give solution to the capital shortage problem faced by the banking system.

However, there are limits to the extent to which hybrid capital can be raised and continuous equity dilution is also not possible due to high cost of equity and government’s majority holding in public sector banks, the release said.

Banks have also hiked their deposit rate by 50-150 basis points in Jan-Feb to mobilise funds, which has in turn raised their respective cost of funds.